Markets Could Lose 'Quite a Few Percent' on Easing Disappointment

Global equities have rallied in the past several sessions on expectations that central bank meetings this week would result in more monetary easing measures. But some analysts tell CNBC that further stimulus is unlikely and markets are setting themselves up for a selloff.


Optimism for fresh measures from central banks, especially the European Central Bank, pushed European and U.S. stocks higher late last week and Monday after President Mario Draghi said the bank was ready to do whatever was necessaryto save the euro. Adding to his dovish comments are U.S. Treasury Secretary Timothy Geithner, German Finance Minister Wolfgang Schaeuble and Chancellor Angela Merkel, as well as French President Francois Hollande, who all said in the past week that they would act to stabilize euro zone nations.

But analysts say stock markets have run ahead of themselves and could lose “a few percent” if nothing comes through this week, said Sean Darby, Chief Global Equity Strategist with Jefferies Hong Kong. The Federal Reservewill wrap up a two-day meeting on Wednesday, and the ECBmeets on Thursday.

“I think we can expect quite a few percent being knocked off some of these indices,” Darby told CNBC Asia’s “Squawk Box”on Tuesday. “It’s going to be all talk, no action.”

The economic situation in the U.S. is not so dire that the Fed needs to embark on a third round of quantitative easing , Darby said. And ECB President Mario Draghi needs to get the German Bundesbank on his side before he can truly turn around the euro zone financial contagion, he added.

“So until that happens, I think we are going to keep reverting back to the lows of the equity markets rather than the highs,” Darby said.

Richard Jerram, Chief Economist of Bank of Singapore, agrees that there’s “nothing much” the central banks can do that will solve the deep-seated debt crisis and markets will react accordingly. The ECB can only “throw more money” at the problem while the Fed is unlikely to crank up the easing unless the employment situation worsened, he said.

“The markets will presumably go right back (down) again, and go back even further on the basis that there's all talk, there’s no action,” Jerram said. “So I think they need to deliver something.”

As investors await the Fed, there is a whole slew of data on Tuesday from the U.S., including personal income and spending, employment cost index, S&P/Case-Shiller home price data, consumer confidence and Chicago Purchasing Managers’ Index. Some Fed watchers said unless the economic situation deteriorated, the Fed would hold off on easing and would on Wednesday lay the groundwork for easing in September, as well as extend the time frame for extremely low interest rates to mid-2015 from 2014.

Bill Smith, President of financial advisory firm SAM Advisors, says investors may need to ignore central banks’ policies and, instead, focus on individual stocks.

“We don’t really put that much into what the Fed will do, or the ECB for that matter,” Smith said. “It doesn’t affect what we do on a day-to-day basis; there are still great stocks out there. Some are trading at severe discounts to their growth rate. I still think there’s still a lot of opportunity.”

— By CNBC’s Jean Chua.